The end of the year is rushing to a close, which means now is the time to finish your plans for saving money on your taxes. While there are some things you can do after December 31st to lower your tax obligations, most things must be accomplished by the year’s end. These year end tax tips are things you can do between now and December 31st to lower your tax obligation next year.
Contribute to your retirement accounts. Most contributions to your defined contribution plans such as a 401k, 403b, TSP, etc., need to be made by December 31st. Increasing your contributions will reduce your taxable income. You can also contribute to a Traditional or Roth IRA, SEP IRA, or Solo 401k plan and certain other retirement plans after December 31st and still reduce your taxable income – as long as you contribute before the tax filing deadline.
If you can contribute extra to your retirement funds this year, then try to do it in the accounts that close out by the end of the calendar year before contributing elsewhere. Here is more information about how to maximize your retirement plans at the end of the year.
Donate to charity. Any donations you make to a qualified charity can be deducted when you file your taxes next year. This includes donations such as tithing or giving to an organization such as Goodwill, or the USO. Before you give to organizations, you should know which questions to ask to determine which charities are legitimate and be aware of charity scams.
Pay qualified business expenses. If you have your own business, you can write off certain expenses. As long as you pay your expenses by the end of the year, you can write it off next year. I run a couple websites, so for me, this would include things like prepaying for web-hosting, buying a new computer, paying for advertising, or other qualified business expenses. Your business may have other expenses which you can pay during the tax year to get the deduction this year. This is an area where hiring an accountant can really pay off.
Additional tips for saving money on your taxes:
- Contribute to a Health Savings Account. Contributions to a Health Savings Account are made with pre-tax income.
- Harvest your losses. You can sell losing investments and offset up to $3,000 of other income per year. Any additional losses can be carried forward to future years.
- Prepay your mortgage and property taxes. If you itemize your taxes, you can deduct mortgage interest and your property taxes. If you make your January payment in December, you can deduct the interest for the tax year in which the payment is actually made.
- Prepay other deductible expenses. You can also prepay other deductible expenses such as medical costs, student loans, etc.
- Complete any deductible home improvements. Certain home improvements are tax deductible if they improve your home’s energy efficiency.
- Avoid mutual funds with high capital gains distributions. Capital gains distributions equal taxes, even if your fund lost money.
- Contribute to a 529 plan for your kids. Many states allow deductions for 529 contributions.
- Deduct job related expenses, including moving. If you moved over 50 miles for a job or relocated due to military requirements, you can deduct related job expenses. You can also deduct mileage on your personal car if it was used for work (commuting does not count).
- Have a baby. Babies are great tax deductions!
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